5823 WEEK 3- Financial Statement - Neighborhood Cafe

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1 Financial Statement - Neighborhood Cafe Trine University Finance 5823 Dr. Arlene Goodman January 23, 2023

2 Financial Statement - Neighborhood Cafe In this paper, we will be explaining what components are included in Neighborhood Cafe’s financial statement and analyzing the findings relate to the financial statement. The major section that will be covered in this paper will include Core Business Assumptions, Revenue, Expenses, and Operating Cash Flow. By the end of this paper, we will have a better understanding of parts of a financial statement and how to analyze data from statements better. The first part of the financial statement model of Neighborhood café is their Core Business Assumptions. In this section, key underlying assumptions that can help understand a company’s performance and be used in projections are included. Some of the things included in Neighborhood café’s business assumptions are Growth per month; which indicates the revenue increase per month, Average check per person; which indicates the average amount of money a person spends per visit, Customer served per day, days per month; which indicate the operational day of the cafe, Food costs as % of total revenue; which indicates a percentage of total revenue is determined to be the cost of food, Labor as % of total revenue; which indicates a percentage of total revenue is determined to be the cost of labor. When analyzing the Core Business Assumptions of the cafe, certain things can be noted. The first thing that we find is that the business growth is quite stagnant at 0.05% per month totaling to a 0.6% growth per year, this can be due to the limiting factor that the cafe has such as their maximum number of seats or their operations time in a day. The second part of the financial statement model includes Revenue, which in this case is the income that the cafe generates from its normal business activities that we can assume from selling food and beverages to customers on a day-to-day basis without being subtracted to its

3 related costs. Revenue is one of the key components in forecasting and budgeting as well as measuring a company’s growth over time. It can also be used as a benchmark to compare to other company averages or previous periods. One key piece of information that we can derive from Neighborhood Cafe’s revenue for the year is that it has stayed relatively constant with a growth of 0.05% a month or 0.6% a year. The cafe has shown that revenue over the year has stayed constant because of limiting factors like the size of the cafe, or how many people they can serve in a day. In order for growth to occur for the business, a change in its business conduct or expansion would need to occur. The third part of the model includes Expenses. Expenses can be categorized as any costs that are incurred related to its normal business operation such as cost of goods sold (COGS), selling, general, & administrative (SG&A) expenses, taxes, and marketing. From the financial model, we can derive a few patterns and regular occurring expense that happens for the business. Labor and food cost stays relatively the same because they scale to revenue. Rent & Utilities, insurance, website maintenance, and bookkeeping cost can be seen as fixed costs since they are the same for each month. Legal and accounting fees are expenses that happen every quarter that is probably due to quarterly audit. The expenses section from the cafe’s model shows regular business activities with nothing out of the ordinary, showing a healthy functioning business. The last part of the Cafe’s model is operating cash flow which is a metric that measures the cash generated or used by the cafe’s business operation. It is calculated by subtracting cash generated from revenue from the cash used in operations. Operating cash flow can show whether the company’s main business operation is generating any money from the sale of goods or services, Edge (n.d.) . The cash left in operating cash flow can be used to invest in the company itself, pay the debt, or invest in other opportunities. Since Neighbourhood Cafe is generating

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4 positive operating income, it is safe to say that they are financially healthy and able to reinvest in its core business or in other opportunities. As we analyzed from Neighborhood Cafe insights regarding the business are shown along the way. From the models, we are able to interpret how they are doing, what they are lacking, and some of the things that the cafe can implement in the future in order to grow its business further. This is why it is essential for an analyst to be able to expound on a financial statement in order to make insightful business advice.

5 References Edge (n.d.). FINANCIAL MODELING, Financial Statement Modeling[PowerPoint slides], Edge